A month after being put on watch, Deutsche Bank was finally downgraded on June 1. And the markets will be watching to see what happens next.

That Deutsche Bank was finally downgraded comes as little surprise. I’ve personally been hearing for years that they were a bad trade or two away from running into real trouble. And now it appears as if that moment has finally arrived.

Additionally, it was revealed that the Federal Reserve secretly downgraded the bank a year ago to “troubled condition” status, and DB is also being charged in a criminal probe by Australian prosecutors. Not a good week, and the stock price was hammered in response.

The main concern at this point is whether the downgrade will trigger a credit event that will affect Deutsche Bank’s massive derivatives book. Should that occur, the potential for a Lehman-type moment becomes a real possibility.

Further exacerbating conditions was the other news this week that the Italian government is in chaos. The Italian bond market got clobbered, and given that many of the banks are owners of the Italian debt, the risk of a serious contagion that would even further degrade Deutsche Bank’s balance sheet is also rising.

For years those in the free-market Austrian Economics circle have warned of the problems that would result from the past decade of central bank expansionary policy. Now it appears as if the breaking point might finally be upon us.

It will be fascinating to see how the situation develops in the coming weeks and months. And personally I think we are close to the point where the markets begin to walk away from the existing system.

I continue to see precious metals and cryptocurrencies as an excellent response to diversifying out of the dying currency and debt markets, and wonder how much longer the opportunity to reallocate at current prices will exist.